Jamba's Stock Looks Juicy

By Tom Gibbs - July 2, 2012 | Tickers: KO, JMBA, MCD, PEP, SBUX | 0 Comments

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The seemingly ubiquitous health food kick continues to rapidly gain steam, and there is no shortage of news tidbits stemming from the bustling sector.  Traditional soft drink producers including Pepsico (NYSE: PEP) and Coca-Cola (NYSE: KO) have placed higher emphases on less-sugary substitutes to their flagship products, and will need to continue doing so as the unhealthy stigma surrounding colas strengthens alongside increased government intervention.   Likewise, quick-serve restaurants including McDonald’s (NYSE: MCD) and its slew of “me-too” competitors have focused new product launches on healthier sandwiches, wraps, salads, and smoothies. 

Historically flying relatively under the radar is pure-play health food retail chain Jamba Juice (NASDAQ: JMBA), which has had a very mediocre operating experience over the majority of its 20+ year existence.  Despite the lack of focus on Jamba Juice – especially now that many heavier hitters including McDonald’s and Starbucks (NASDAQ: SBUX) are entering the smoothie and healthy juice market – the corporation has outlined a very reasonable plan to turn around its operations.  Based on several key metrics in its recent financial statements, the plan seems to be taking hold.

Business Model Shift

Founded in 1990, Jamba focused its initial growth phase on steady expansion through incremental company-owned restaurant rollout.  After its IPO in the mid-2000s, the corporation used its raised funds to rapidly accelerate a growth plan along these same lines, and the retailer’s company-owned store count grew more than 33% between 2007 and 2008.  Following the huge surge in stores, comparable store sales fell 8% and the company reported a net loss of $150 million in 2008 – the plan wasn’t working.

Taking a cue from more established players in the quick-serve restaurant space, Jamba Juice has highlighted franchise-fueled growth over the past four years.  Between early 2009 and early 2012, the corporation’s franchised store base more than doubled to 469 stores while the company-owned store count dropped by 40%.  With more than 60% of its 770+ stores now under a franchise model, Jamba is starting to look much more like the firmly established and better performing competition in the field.

The continued shift to a more franchised business model will undoubtedly provide lower top line figures and slower growth over the mid-term.  In the most recent quarter, for instance, total revenues dropped 19.8% and were fueled by a 20.9% drop in company-owned restaurant revenue and a slight 1.7% increase in franchise fees collected.  Despite the shift in how Jamba Juice generates revenue, the franchise model will provide several key benefits going forward.

• Consistent Experience: Stepping away from day-to-day restaurant running minutia, Jamba Juice can devote more assets to perfecting its consumer experience. 
• Swifter, More Manageable Growth: Once the positive customer experience guidelines are established, the corporation will have a much easier time to roll out its stores both domestically and internationally.  Jamba Juice will be inherently much more asset light in a franchise model, allowing itself to better manage its growth without taking on crippling amounts of debt (the company is now debt free).
• More Value-Adding Projects: Having the ability to take a small step back from the daily restaurant operations, the company can place more emphasis on new product launch and its promising consumer products division.

Performance Improvement

Alongside the corporation’s shift to a more franchised model has also come the significant cutting of costs.  In shedding underperforming stores and more than 50% of its workforce since 2008, Jamba Juice has created a closer-knit operating system that is overall much more efficient.  Cost of sales as a percentage of revenues, for instance, have fallen from a five-year high of 26.6% to a trailing twelve-month rate of 21.5%.  Similar advances in labor costs have also taken place, and the trailing twelve-month labor costs/revenues rate of 28.7% compares with the five year high in excess of 35%. 

As a result of the cost cutting measures that have been taken, the corporation may be generating less revenue between its company-owned and franchised store system, but the revenue is of a much higher quality.   Revenues of $213.3 million in the past twelve months may be significantly below the $317.2 generated five years ago, but the EBITDA margins of 3.7% (ttm) compare nicely with the -65.9% rate reported in the fiscal year ending January 2008. 

Jamba Juice is also on a Starbucks-like kick to improve sales in all of its day-parts.  Although some of this improvement has come from serving up an overall better consumer experience, a significant portion has come from new product launch.  In addition to its large lineup of traditional smoothies, Jamba Juice has begun serving fruit and yogurt parfaits, sandwiches and mini-wraps, frozen coffee drinks and frappuccinos, and assorted baked goods.  The menu-rounding products seem to have been received rather positively, and comparable sales in the breakfast, lunch, afternoon, and dinner timeslots increased 9.6%, 12.8%, 14.9%, and 12.3% in the most recent quarter, respectively. 

Overall comparable store sales have also been on a prolonged positive trend after a disturbing period of stagnation.

The corporation has recently increased its guidance for comp sales for the entire year to 4-6%, which compares to the previously guided range of 3-4%.  On top of the 3.7% system-wide comparable sales in 2011 and the largely-negative comp sales prior, the updated guidance reaffirms the improvement within Jamba’s operations. 

Consumer Product Group

Starbucks has had a considerable amount of success with its own consumer products sales platform, and its division’s sales have increased more than 2.5x over the past five years to $819 million in 2011.  Not only do these supplemental activities add attractive revenue streams, but they also help to build the brand as the corporation can boost top-of-mind awareness by pushing product in complementary sales channels. 

Jamba Juice also has a growing consumer products lineup consisting of smoothie makers, popsicles, ready-to-blend smoothie packages, supplement shots, trail mix packages, and juice pouches.  The corporation has intentions of hitting 50,000+ points of distribution (grocery stores, mass merchandisers) by year-end, a 40+% increase over last year’s level.  Through more distribution points and more new product launches hitting those points, Jamba Juice believes that it can hit $1 billion in product sales by 2016, $20 million of which can be gathered by the company in the form of licensing fees.

Just as important as the additional revenues, however, is the brand building that will stem from the sale of products outside Jamba Juice outlets.   Although a value cannot necessarily be placed on such intangible side effects, there can be no doubt that they do exist and that they do have long-term worth.

A Buy?

Jamba Juice has shown over the past year that it is well past its identity crisis period, and company management seems to have realized that it cannot continue to grow at such a fast pace through a company-owned store format.  Although the company is bound to achieve a lower top line through its new franchise focus, the dollars will be of higher quality, the company can grow in a rather asset-light fashion, and it can keep its eye on the big prize (building a health food empire) rather than being bogged down with individual day-to-day restaurant operations.

The continued turnaround of Jamba Juice’s operations will not be an easy task, especially now that the competition is more intense than ever due to entry within the niche by heavy-hitters like Starbucks and McDonald’s.  This being said, however, Jamba Juice does have significant room to grow and to become more profitable.  Reaffirmed guidance for 2012’s adjusted operating profit margins of 20-23%, for instance, show a great improvement compared to 2011 and 2010 margins of 19.9% and 15.6%, respectively.  A twinkle at the end of the long and dark tunnel through which Jamba Juice has traversed over the past five years can finally be seen. 

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